Earlier this month, Meg Sanders, CEO of Massachusetts-based Canna Provisions, wrote an article urging licensed cannabis business operators to rethink their strategies for the tough road ahead. With an imbalance between supply and demand—and an influx of licensees yet to open their doors—the cannabis market, from Massachusetts to California and back again—is facing tough times.
“People are getting all excited, ‘Oh, I got my provisional license! Oh, I got my final license!’” she says. “And I’m like, ‘You just got a license to lose money, dude.’” The impetus behind the article was to elaborate, to build out a public argument that significant economic issues are dragging the young industry into a new era.
As things stand in early 2023, the cannabis market is in a tough spot. Prices are declining (retail, wholesale, stock prices—you name it), and yet canopy and harvest size are increasing in many states. Broader economic guardrails that we might expect in more established markets are not yet fixed in cannabis; regulatory agencies don’t have a grip on what’s coming into the market and what’s going out. Just take the Massachusetts wholesale market as an example: Prices dropped from $3,387 per pound in January 2022 to $1,416 per pound in January 2023. That’s a 58% slide.
And yet the Massachusetts Cannabis Control Commission faces an influx of eager applicants for all license types. At the commission’s Feb. 9 meeting, members addressed the applicants behind 19 provisional licenses and 10 final licenses. Another 52 businesses awaited word on their license renewal.
This current landscape is not the first cannabis economic cycle Sanders has experienced. In Massachusetts, the problem is particularly acute, perhaps because the state is one of the more “legacy”-ish markets in the U.S.; adult-use cannabis sales began in late 2018.
Like their brethren in Oregon and California, Massachusetts operators are thrust into a race to the bottom. “Survival” is a word that gets mentioned often in conversation.
“We manage cash flow,” Sanders says, pointing out a distinction between her actual day-to-day and the longstanding myth that the cannabis retail business basically prints money. “That’s my business. And it’s getting tougher.”
She’s not alone. All told, Massachusetts regulators preside over 491 licensed adult-use cannabis businesses. And then even Massachusetts isn’t alone in this. The cannabis market may be fragmented in the U.S., but these economic broadsides tend to be fairly universal.
To get a sense of how this price compression trend is playing out in Massachusetts, we spoke with operators up and down the supply chain (and outside of it). New strategies are emerging—as well as some time-tested strategies being brought into cannabis with a new urgency. The power of branding is coming to the forefront of the market right now, as licensed operators realize they must differentiate their business in an increasingly oversaturated landscape.
Cultivation
That saturation point is often identified at the cultivation segment of the industry. If the price compression issue is at least partly rooted in oversupply, then the suppliers (growers) themselves are in the spotlight.
“We’re a craft grower, so we have concerns,” Sanders says. Canna Provisions is a vertically integrated operator, and this may be one key to navigating these tough economic challenges: An operator can control the supply chain with every link in vertical integration. But Sanders is quick to point out that “craft,” as it were, can only scale so much.
Out on shelves, Sanders describes what many other growers are describing: There’s premium flower and there’s value flower. Both have a place in the market, but growers are the ones stuck trying to thread the needle. Consumers are often willing to pay for the more nuanced, chemically diverse premium flower—but first they must be educated on what, exactly, that means. And still other consumers are often willing to purchase value flower—but there’s so much of it in the licensed market, how is anyone supposed to develop brand loyalty?
“There’s plenty of average-quality flower out there, and that is definitely the most sensitive as to how much the wholesale cost will be—because it will just sit,” she says. “If it doesn’t have something unique, i.e., high THC or massive terps or something that really creates a buzz about it, it will just sit. And then it becomes a retailer problem, like ‘Even though I bought it for cheap, now I’ve got to lower the price to get it out.’ As you know, everything expires in cannabis.”
To counteract that problem, Canna Provisions leans into the craft market. Craft-vs.-premium: It may appear like a false dichotomy, but increasingly the market is nudging operators in one direction or the other.
This inverse bell curve—where most growers will fall either to premium or value cannabis products—is maybe the defining strategic driver of 2023.
Brandon Pollock, CEO of Theory Wellness, which is vertically integrated in Massachusetts, agrees. He says that the price of cannabis has begun to vary widely based on that inverse bell curve. His cultivation team has also elected to funnel resources toward the premium end of the SKU spectrum.
Theory Wellness holds a Tier-2 cultivation license in Massachusetts, which allows up to 10,000 square feet of canopy. “That’s intentional, because we don’t want to be fighting that race to the bottom,” he says. “The real difficulty that a lot of the smaller, independent cultivators find is they’re competing against large companies that can operate at break-even or even at a loss—just to keep their market share.”
Add in the pricing gap, and the uneven competition grows more out of whack. But to level the playing field a bit, Massachusetts regulators have embarked on several social equity plans.
Trade Roots is reportedly the first vertically integrated social equity cannabis business in the state. The company opened its facilities in early 2022, bringing co-founders Carl Giannone and Jesse Pitts’ vision of premium cannabis to the Bay State.
Giannone—who’s earned himself the nickname “Calamity Carl” on LinkedIn for his matter-of-fact posts about market trends—says he and his team saw this coming, so they built a strategy around vertical integration to stave off the worst of the pricing pressures. Here’s how he sees the buildup to this problem:
– Extant medical cannabis companies were the first to be brought into Massachusetts’ adult-use market in 2018 (and they were required to be vertically integrated). Prices were high. Lines outside dispensaries ran for blocks.
– The next year, 2019, brought a U.S. market-wide price dip as public companies began losing value.
– The coronavirus pandemic brought a huge surge in consumer demand, with plenty of new spending money on hand. Massachusetts allowed non-vertical operators to step into the market. Retail, being relatively cheap, was the first to see a buildout surge.
– To accommodate the growing field of retail, wholesale prices shot up (briefly).
– “Then you saw this major buildout in cultivation, and that’s where we are right now,” he says.
With more canopy, and thus more imminently harvested plants, coming online, retail prices are staying low as 2023 continues.
“Price compression is a concern, but also: How long is a price compression a concern?” Giannone asks. “With prices where they are and costs where they are, I suspect by summer we see more of a stabilization on the producer side in Massachusetts, but I’m sure you’ve seen the headlines of the closures. There’s a lot more you haven’t seen yet.”
Processing
Operating within the wholesale market, processing licensees have a tremendous opportunity to buy low and sell into a marketplace dominated by customers who are (in many cases) seeking out new, innovative products. Like Pollock says, there’s a certain segment of cannabis consumers that wants to be wowed. Many are happy with their reliable eighths of Durban Poison. Others are interested in value bags of shake or BOGO vape cart deals. But there are dynamic trends at play, and the savvy brand can capitalize on this moment.
Take Jason Reposa and his company, Good Feels, as an example. Good Feels is an infused beverage company, offering bottled seltzers and beverage enhancers (in tincture form), which launched in early 2022.
Already he was aware of pricing pressures. Coming from the hemp space, where CBD isolate prices crashed a few years back, Reposa took cues from more mature markets (like California) and decided to stay away from the cultivation segment and pursue this processing license.
“The writing’s on the wall,” he says. “It’s an agricultural product.”
When he and his team were kicking the tires on the market, Reposa gathered informal quotes on distillate at $45,000/liter. By the time Good Feels launched, he purchased the company’s first liter for $17,500, which helped his outlook on the 2022 budget. “Our raw input is distillate for the most part,” he says, making this a top priority on the balance sheet.
Then the next liter came in at $12,000. Then $8,000.
“And then I’m like, ‘I don’t know when this is going to stop,’” he says. “Our last [liter] we purchased was $6,000. The last quote I got was $4,000. That’s how fast it’s happened. We launched at $17,000.” That’s a 76% slide.
And as the wholesale price has declined, Reposa has lowered Good Feels’ suggested retail price. The team has been able to really increase its volume and proactively lean into the price compression in Massachusetts. It helps, too, that beverages, generally speaking, are seen as a more innovative product offering—to those consumers interested in trying something new. It’s a small niche in the overall market, yes, but it’s growing fast.
Giannone and Pitts at Trade Roots would agree. Their team produces a spectrum of concentrates, vape products, edibles and tinctures.
“Really, our biggest saving grace has been our extraction lab,” Pitts says. “Having what we call the different ‘levers’ of the different verticals, we’re allowed to pivot … based on what the market’s doing.” He says that Trade Roots has similarly leaned into the glut of flower that turned into a boon for processors with extraction capabilities.
Retail
Reposa, who spends ample time speaking with retailers, points out that “Every store has its own demographic.” He knows that Good Feels will move fast in certain stores whose consumer bases enjoy the beverage scene, and in other stores it’s a tougher sell.
This is another critical piece of the puzzle: Retailer, know thyself.
And this is largely what Sanders, of Canna Provisions, was communicating in her Business West article earlier this month. She urged cannabis businesses of all stripes, but primarily dispensaries, to rethink how they conducted themselves in an ever-tightening marketplace.
The price compression narrative is just one aspect of the market. And it’s a big one, but Sanders warned other teams in Massachusetts not to get too carried away with price.
“Prices are going up everywhere, but for some reason, we as an industry are on this slippery slope of price and assuming that we will get more consumers out of it,” she says. “That’s a pretty failed model. Dumbing [your retail business] down to price is not a great strategy.”
Rather, she suggested in her article that retailers focus on three tentpole tenets:
– quality of product
– a consistent and predictable retail experience
– the education level of the consumer
Retailers have a unique hold on each of those touchpoints in the cannabis supply chain. She says that budtenders on the front lines of this industry—compressed prices or not—must educate away from “high THC” and explain the meaning of more nuanced craft profiles. Most dispensaries are doing this by using the parlance of “effects” for branded products, like “Relax” or “Rejuvenate,” concepts that can easily usher a consumer into the more complex scientific world of terpenes.
It’s not that high-THC products are a blight on the industry, per se, but rather it’s an overly simple way of understanding a complicated plant. These are still the early days of legal cannabis, and if there’s just the one lever—THC content—guiding most transactions, then the race to the bottom will be swift. But if retailers guide the conversation, educate the market and deliver eye-catching sales trends to processors and growers upstream, then Sanders says you’ll begin to see a turnaround on that race to the bottom. It may not look like a race at all, but rather an entourage of different economic effects.
If this is to happen, each major link along the supply chain must work in concert to understand how consumers are engaging with this rapidly evolving industry.
From Pollock’s viewpoint, at the helm of Theory Wellness, this is becoming obvious; this need to identify your company’s mission and tap into a more meaningful connection with consumers—before it’s too late!
“We’ve seen a widening in a gap between pricing,” he says, and he points out that cultivation businesses small and large must dial in their position on one side of that gap or another. It’s that inverse bell curve, and it’s becoming critical to the marketplace.
“It seems like consumers are really going for the most bang for their buck, or they want to have the most premium experience they can find,” he says, adding that middle-of-the-road price points are getting hard to move. If growers are stuck in that zone, it’s time to commit to something more specific.
“I think that’s really the biggest risk I see in this, is squeezing out the smaller operators,” Pollock says. “A lot of retail stores are not very sophisticated right now, where they’re just buying simply based on price and testing. They’re not looking at the quality, they’re not looking at the freshness of the flower. It’s a little short-sighted, but that’s just where the market is.”
It would be nice to paraphrase a common line about the weather in Midwestern cities: If you don’t like the conditions in the cannabis market right now, just wait five minutes. But as 2023 unfolds, it’s clear that this trend may take a little longer to sort out.
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